After a steep drop during the boom of 2005 to 2006, small business bankruptcies have risen sharply as the recession has progressed.
The increase accelerates even further starting in Q308. This was likely driven by:
- A decrease in consumer and business spending during the beginning of the recession in Q407 (the weakest companies go bankrupt).
- Frozen capital markets and less lending by banks following Lehman's collapse in Q308. This caused day-to-day liquidity to become very difficult to obtain (even seemingly strong companies started to go bankrupt).
The rise in small-business bankruptcies should slow as the economy recovers, but they will likely remain high for a while. Although the stock market appears to believe that we will have a "v-shaped" recovery, high unemployment and distressed consumers suggest that a complete recovery will take years.
Additional reporting by Rory Maher